Efficiency and Productivity: It’s a Vicious Cycle For Farmers

I recently read about one soybean producer from Missouri who broke the world record for soybean production coming in at 139 bushels per acre.  I knew of that last year however reading this recent piece was a confirmation of that never ending technological ladder.  When you farm the never ending incentive to get more efficient is a vicious cycle.

My soybeans yield last year was 52 bushels per acre, the second highest I’ve ever achieved.  So I’ve got a long way to go.  My record yield is 58 bushels per acre.  I finished that year huffing and puffing, so I cannot even imagine 139.  Going further could you imagine how 139 bushels per acre would affect the soybean market?  Don’t laugh.  The way things happen in agriculture it might be right around the corner.

Agricultural economists would say it’s all about getting more efficient.  My city cousin economist friends would say it’s all about getting more productive.   Whatever you think, the road to greater success seems to always mean producing more and doing it cheaper.

I once got into a long discussion about this with regard to the grain markets.  As all of you know we’ve been following the corn to usage ratio over the winter.  Scribblers like me have been warning readers about a 5% corn stocks to use ratio for months now.  It begs the question how are we going to avoid disaster?

That March 30th 90.45 million acre number from USDA might solve that problem.  It’ll play out over the next 4 months.  The other facet of the equation is the efficiency question.  Can the grain trade manage corn scarcity efficiently enough to foster an orderly market regimen until fall harvest?

That answer may cause wide basis fluctuations as we go through the summer.  However, the futures market is key to managing this risk.  Without it, grain couldn’t be traded and priced into future.  Managing risk wouldn’t be efficient, in short it would be a nightmare and farmers would surely pay in the end.

One example of this is what grain analysts refer to as “the percentage of commercial carry” between futures months.  I read this stuff all the time, but never really pay much attention to what it means.  So last month I contacted Elaine Hub, the DTN Analyst who writes the closing grain comments every day.  I asked Elaine, what significance does “the percentage of commercial carry” have for the grain producer.  The following is what she wrote back and said.

When we write X% of full commercial carry, we are essentially dividing the premium (or spread) of one contract over another by the cost of storing that amount of grain for that amount of time.

For instance, if July corn futures were worth 12.75 cents/bushel more than May corn futures, one might be tempted to buy cheaper corn in May and hang on to it until it could be sold for a higher price in July. However, if you bought corn in May and had to store it until delivery in July, you would have to pay about 9 cents/bushel (a number provided to us as an average of costs at elevators across the country) to store it for 61 days, plus about 4 cents/bushel in interest costs. Divide:

12.75 / 13.6 = 94%

That means that commercial corn traders are willing to pay whoever is currently holding corn a more-than-12-cent premium to keep hanging on to that corn for another two months, because they don’t want it now; they are bearish. The commercial traders are in effect comp-ing the grain marketers for the costs that are associated with keeping the corn off the market right now. The higher that percentage is, the more commercial traders are willing to pay producers *not* to flood the market with excess supply, and thus the more bearish the market already is. Anything over 60% of full commercial carry is considered bearish. As for what is normal, that depends on what the cost of storage is. Percentage-wise, between 30 and 60 percent is considered neutral, indicating that traders are not strongly in need of corn, nor strongly opposed to more of it placed on the market. (Elaine Kub DTN Analyst)

Interesting stuff for sure.  For instance the May to July futures spread for corn on April 12th was 97% of full commercial carry, which means there is a lot of corn around.  The November to January 2008 spread is much tighter at 54%, which reflects the risk involved on the long road to harvest.

You might think of it as nuts and bolts but really its more than that.  It’s simply the grain trade efficiently fostering the movement of grain letting out market signals when and if they want corn.  As producers the more we learn about this the better.

The downside for price watchers with a full bin of corn might be that we move and distribute grain more efficiently than back in 1996 when corn stocks ratios were this low.  Elaine’s explanation is only one facet of that.  Other technological improvements such as computer technology facilitate greater efficiency in grain movement.  This will all play out as we careen into a spring and summer where managing scarcity with a big crop in the field will be paramount.

Will they/we get it done this year?  Yes, although we might have a few rocky moments.  And at the end of the day everybody will be more efficient and productive setting us up for next year.  It’s a vicious cycle.  The beat goes on.